Around the Web: A Month in Summary
A recent article posted on the Axial Forum entitled “What Do Buyers Look for in the Lower Middle Market?” explains how to make your business valuable to potential buyers and how to find the right buyers for your business. The buyers in the lower middle market are usually strategic buyers, financial buyers, private equity firms, and search fund advisors.
Buyers in this market are generally looking for the following characteristics:
- A strong management team who has incentive and is prevented from competing against the company if their employment is terminated
- Stability and predictability of revenue and cash flow
- Low customer concentration
- Other value drivers such as state-of-the-art operating systems
- High level of preparedness
The article warns about the biggest obstacles for owners. Business owners should consult with experienced deal attorneys and investment bankers before speaking to any buyers. They should also consult with advisors before the company goes on the market to make sure the business is properly prepared for sale. A business owner’s management team may also be subject to rigorous professional assessment and background checks if a private equity or financial buyer is interested.
Currently in the marketplace, buyers are offering amounts higher than the historical norms. This means that along with the higher sale prices, sellers are subject to more scrutiny through due diligence. This is all the more reason for a seller to be prepared and to work with experienced advisors to get their business ready for sale.
Click here to read the full article.
A recent article from the Axial Forum entitled “5 Ways Sell-Side Customer Diligence Can Maximize Sale Prices” explains how third-party sell-side customer diligence has become increasingly more common and why it can help sellers maximize and justify sale prices. Here are the 5 ways this due diligence can help you get the best sale price:
- Determine if it’s the right time for a sale – Positive customer feedback can help reinforce the decision to sell, and neutral or negative feedback can help improve the company so it will be better prepared for a sale.
- Attract and persuade buyers – Your confidential information memorandum (CIM) will show how strong customer relationships are, how your market share has grown, how the business has become more competitive, and more. Thorough documentation of the health of customer relationships will also help attract buyers.
- Control the message – Having the seller contact their customers reduces the risk of anyone being tipped off about the sale and also allows for the seller to provide a better interpretation of the results.
- Prove there is a clear path for future growth – Pre-sale due diligence can help justify the ways in which the company can grow in the future.
- Accelerate the timeline – Having customer diligence done ahead of time will speed up the process so the buyer doesn’t have to do it.
Sell-side due diligence gives the buyer a good overall assessment of customer relationships while also allowing the seller to control the process of the findings and substantiate their asking price.
Click here to read the full article.
A recent article from Inc.com entitled “The Art of Finding the Right Buyer for Your Business” gives us three essential items to consider when selling a business.
- Set goals – The first step is to set goals for the future of your business, yourself and your family. You’ll want to consider factors such as how the transaction will affect your employees, if you will continue on as a team member or transition out of the company, and what your overall goals for the company are. This will help you and your advisor customize the sale process.
- Explore options – Be sure to know the difference between a private equity group and a strategic corporate buyer, and find out how they can benefit your business. There are also “family offices,” which are investors who manage the wealth of a family or multiple families, but they hold a business forever.
- Keep an open mind – It’s especially important in the beginning to stay open to both types of buyers and find a good advisor who can help guide you towards the right buyer. Whether they are a financial buyer or a strategic buyer, you don’t know how they are going to handle the future of a company until you get to know them.
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A recent article from the M&A Source entitled “Gold Rush: New Entrepreneurs Seek Search Funds to Finance Takeovers of Baby Boomer Businesses” explains how new entrepreneurs are looking for funding to take over businesses as the baby boomer generation starts to retire. There is currently an entrepreneurial generational gap with far less young entrepreneurs than there are baby boomers looking to sell. Healthy financial trends paired with recent tax reforms have contributed to making ideal conditions for the new generation of small business owners.
This new generation of entrepreneurs is coming from recent MBA graduates who are choosing to acquire a business instead of heading to Wall Street. Most notably, they are doing things differently when it comes to financing by turning to the search fund model which is seeing unprecedented growth as of late. This process known as entrepreneurship through acquisition (ETA) is also becoming increasingly popular in business schools which are now offering ETA programs.
It is believed that this trend is going to continue and that the timing is right. More schools are increasing awareness about it and the model will get easier as more baby boomers retire and sell their businesses. As more big money sources see this model gain popularity, there will be more money to support this growth as well.
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A recent article posted by Divestopedia entitled “Avoiding the Biggest Deal Killer: Time” tells us that the key to a successful deal is preparation and momentum. This means that the seller should be fully ready when the business hits the marketplace, not when the first offer is made.
To keep the momentum going, there are 14 factors to consider:
- Know when it is a good time to sell your business
- Know why you want to sell
- Know the company’s strengths and weaknesses
- Know what you will do after you sell your business
- Know the value of your business
- Have a realistic asking price
- Be sure you are current on all taxes
- Make sure operational details are organized and recorded
- Know that the business can operate without you
- Know your company’s place in the market
- Be prepared with accurate financial statements, tax returns, and financial reports
- Know that your team of trusted advisors is ready
- Have a growth and marketing plan for your buyer
- Know what is most important to you so you can stay focused on the key issues and not worry too much over minor details
Click here to read the full article.
Copyright:Business Brokerage Press, Inc.
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Don’t Let the Dust Settle on Your Lease: 8 Factors to Consider
Owners often neglect understanding their leases and this can be problematic. If your business is location-sensitive, then the status of your lease could be of paramount importance. Restaurants and retail businesses, for example, are usually location-dependent and need to pay special attention to their leases. But with that stated, every business should understand in detail the terms of its leases.
There are many key factors involving leases that should not be ignored or overlooked. If you adhere to these guidelines, you’ll be much more likely to control your outcomes.
- At the top of the list is the factor of length. Usually, the longer your lease the better.
- Secondly, if the property does become available, then it is often in an owner’s best interest to try and buy the property or he or she may be forced to move.
- When negotiating a lease, it is best to negotiate a way out of the lease if possible; this is particularly important for new businesses where the fate of your business is still an unknown. Experts recommend opting for a one-year lease with a long option period.
- You may want to sell your business at some point, and this is why it is important to see if your landlord will allow for the transfer of the lease and what his or her requirements are for the transfer.
- Look at the big picture when signing a lease. For example, what if your business is located in a shopping center? Then attempt to have it written into your lease that you’re the only tenant that can engage in your type of business.
- If you’re located in a shopping center, then try to outline in your agreement a reduction of your rent if an anchor store closes.
- Your lease should detail what your responsibilities are and what responsibilities your landlords hold. Keep in mind that if you are a new business, it is quite possible that your landlord will likely require a personal guarantee from you, the owner.
- The dollar amount is necessarily the most important factor in determining the quality of your lease. It is important to carefully assess every aspect of the lease and understand all of its terms.
There are many other issues that should be taken into consideration when considering a lease.
- For example, what happens in the event of a natural disaster or fire? Who will pay to rebuild?
- Is there a percentage clause and, if so, is that percentage clause reasonable?
- How are real estate taxes, grounds-keeping fees and maintenance fees handled?
Investing the time to understand every aspect of your lease will not only save you headaches in the long run, but it will also help to preserve the integrity of your business.
Copyright: Business Brokerage Press, Inc.
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The Importance of the Term Sheet
The value of the term sheet shouldn’t be overlooked. From buyers and sellers to advisors and intermediaries, the term sheet is often used before the creation of an actual purchase or sale agreement. That stated, it is important that the term sheet is actually explained in detail. Let’s take a closer look at its importance.
What is a Term Sheet?
Even though term sheets are quite important, they are rarely mentioned in books about the M&A process. In the book, Streetwise Selling Your Business by Russ Robb, a term sheet is defined as, “Stating a price range with a basic structure of the deal and whether or not it includes real estate.”
Another way of looking at a term sheet, according to attorney and author Jean Sifleet, is that a term sheet serves to answer to four key questions: Who? What? Where? And How Much?
Creating the Right Environment
A good term sheet can help keep negotiations on target and everyone focused on what is important. Sifleet warns against advisors, accountants and lawyers who rely heavily on boilerplate documents as well as those who adopt extreme positions or employ adversarial tactics. The main goal should be to maintain a “win-win” environment.
At the end of the day, if a buyer and a seller have a verbal agreement on price and terms, then it is important to put that agreement down on payment. Using the information can lead to a more formalized letter of intent. The term sheet functions to help both parties, as well as their respective advisors, begin to shape a deal, taking it from verbal discussions to the next level.
Make Sure Your Term Sheet Has the Right Components
In the end, a term sheet is basically a preliminary proposal containing a variety of key information. The term sheet outlines the price, as well as the terms and any major considerations. Major considerations can include everything from consulting and employment agreements to covenants not to compete.
Term sheets are a valuable tool and when used in a judicious fashion, they can yield impressive results and help to streamline the buying and selling process. Through the proper use of term sheets, an array of misunderstandings can be avoided and this, in turn, can help increase the chances of successfully finalizing a deal.
Copyright: Business Brokerage Press, Inc.
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Your Deal is Almost Done, Then Again, Maybe Not
Having a letter of intent signed by both the buyer and the seller can be a very good feeling. Everything can seem as though it is moving along just fine, but the due diligence process must still be completed. It is during due diligence that a seller decides whether he or she is going to finalize the deal. Much depends on what is discovered during this important process, so remember the deal isn’t done until it is truly finalized.
In his book, The Art of M&A, Stanley Forster Reed noted that the purpose of due diligence is to “Assess the benefits and liabilities of a proposed acquisition by inquiring into all relevant aspects of the past, present and predictable future of the business to be purchased.”
Summed up another way, due diligence is quite comprehensive. It probably comes as no surprise that this is when deals often fall apart. Before diving in, it is critically important that you meet with such key people as appraisers, accountants, lawyers, a marketing team and other key people.
Let’s take a look at some of the main items that both buyers and sellers should have on their respective checklists.
Industry Structure
You should determine the percentage of sales by product line. Additionally, take the time to review pricing policies, product warranties and check against industry guidelines.
Human Resources
Review your key people and determine what kind of employee turnover is likely.
Manufacturing
If your business is involved in manufacturing then every aspect of the manufacturing process must be evaluated. Is the facility efficient? How old is the equipment? What is the equipment worth? Who are the key suppliers? How reliable will those suppliers be in the future?
Trademarks, Patents and Copyrights
Trademarks, patents and copyrights are intangible assets and it is important to know if those assets will be transferred. Intangible assets can be the key assets of a business.
Operations
Operations is key, so you’ll want to review all current financial statements and compare those statements to the budget. You’ll also want to check all incoming sales and at the same time analyze both the backlog and the prospects for future sales.
Environmental Issues
Environmental issues are often overlooked, but they can be very problematic. Issues such as lead paint and asbestos as well as ground and water contamination can all lead to time-consuming and costly fixes.
Marketing
Have a list of major customers ready. You’ll want to have a sales breakdown by region and country as well. If possible, you’ll want to compare your company’s market share with that of the competition.
The Balance Sheet
Accounts receivable will want to check for who is paying and who isn’t. If there is bad debt, it is vital to find that debt. Inventory should also be checked for work-in-progress as well as finished goods. Non-usable inventory, the policy for returns and the policy for write-offs should all be documented.
Finally, when buying or selling a business, it is vital that you understand what is for sale, what is not for sale and what is included whether it is machinery or intangible assets such as intellectual property. Understanding the barriers to entry, the company’s competitive advantage and what key agreements with employees and suppliers are already in place, will help ensure a smooth and stable transition. There are many important questions that must be answered during the due diligence process. Working closely with a business broker helps to ensure that none of these vital questions are overlooked.
Copyright: Business Brokerage Press, Inc.
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Around the Web: A Month in Summary
A recent article from Small Business Trends entitled “41% of Entrepreneurs Will Leave Their Small Business Behind in 5 Years” summarizes a report by a global financial services firm that looks at business ownership and entrepreneurialism in modern America. The report found that almost 60% of wealthy investors would consider starting their own business while more than 40 percent of current business owners are planning to exit their business. Of the 41% of business owners who are planning to leave their business in the next 5 years, half of them plan to sell their business.
The report highlights how heirs in the family are often reluctant to take over the family business and that many business owners underestimate what they need to reach a successful sale. The report notes that 58% of business owners have never had their business appraised and 48% have no formal exit strategy. One of the main takeaways from this should be that small business owners need to prepare for selling their business and they should create an exit plan well in advance.
Click here to read the full article.
A recent article on the Axial Forum entitled “9 Reasons Acquisitions Fail — and How to Beat the Odds” shows us how looking at why others have failed can help you to learn from their mistakes in order to have a successful acquisition. Here are 9 common causes of failed acquisitions:
- Strategy – Poor strategic logic was used and it was not a good fit for integration
- Synergy – Potential synergy between the companies is overestimated or the complexity is underestimated
- Culture – Incompatibility between the companies, ineffective integration, or compromising the positive aspects of one business to create uniformity
- Leadership – Poor leadership, not enough participation in the transaction & integration process, clashes between leaders
- Transaction Parameters – Paying too much, inappropriate deal structure, negotiations taking too long
- Due Diligence – Not enough investigation is done beforehand, failure to act on findings
- Communications – Lack of proper communication can result in talent loss, customer loss, and many more problems which eventually lead to failure
- Key Talent – Failing to identify or retain key employees
- Technology – Failing to identify incompatibilities or underestimating the complexity and time required for integration
Integration involves several steps starting from the initial strategic thinking, to due diligence and then carrying on into the months after the deal is made. Deal makers and business owners need to consider all steps of the process to make an acquisition successful.
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A recent article posted by WilmingtonBiz Insights entitled “How Does Exit Planning Protect Business Value?” explains the importance of exit planning in retaining and growing business value.
The article gives an example of two similar businesses, both valued at $5 million, who take different strategies towards increasing their companies’ values before selling. The first company invests in more equipment and hiring more employees, but does not work with any advisors besides their CPA at tax time. The second company works with their CPA, an exit planning advisor and a tax specialist. They build a strong management team, cut the owner’s work week in half, and convert the company to an S corporation. They also work with a business broker to buy two smaller competitors which broadens their market.
When the Great Recession of 2008 hits, both companies are affected but in very different ways. The first company has to lay off all the new employees they hired and their new equipment sits unused. They end up selling their business for less than what it was valued at. The second company has minimal layoffs and has extra money saved from strategic tax planning. Their business is valued at $15 million because of the two businesses they bought, and they are able to exit their business with $10 million profit. No matter what unforeseen circumstances may occur, the right planning can make a huge difference.
Click here to read the full article.
A recent article from Divestopedia entitled “Constructing a Buyer List and Finding the Right Buyer for Your Company” explains how buyer lists are created and what makes a good buyer. The first step in constructing the buyer list is to determine the objectives of the seller such as leaving a legacy or retaining the local employment base.
M&A advisors will have many existing resources to start with including an in-house database, established relationships in the industry, business networks, and more. Adding your competitors to the list is another thing to consider, which will depend on the goals of the seller and the reputation of the competitors.
The ability to pay is the main qualifier to look at in finding a good buyer. Consider the following factors when looking for a buyer who can pay a premium:
- Economies of scale
- Economies of scope and cross-selling opportunities
- Unlocking underutilized assets
- Access to proprietary technology
- Increased market power
- Shoring up weaknesses in key business areas
- Synergy
- Geographical or other diversification
- Providing an opportunistic work environment for key talent
- To reach critical mass for an IPO or achieve post-IPO full value
- Vertical integration
The best way to find the right buyer is to approach all potential buyers, talk to them and see if it’s a good fit.
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A recent article from Business Sale Report entitled “Almost a quarter launch businesses with a sale in mind” summarizes the results of a new study which asked nearly 1,000 entrepreneurs about their start-up history and their motivation for launching businesses. The study found that 23% of those starting their own business have their exit as a primary goal, with 83% of those claiming that selling at a profit is their main incentive.
The top 2 answers for why they started their business were that “It was a passion of mine” and “I knew it would eventually sell well and had exit in mind.” All of the study participants said that they wished they had an exact way to know the value of their business and more than half said they had no real way of knowing the value of their business.
If you are starting a business with a main goal of selling the business for profit, it is essential to know your valuation so that you get a fair price.
Click here to read the full article.
Copyright: Business Brokerage Press, Inc.
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